On the buy side, we have a love/hate relationship with our stars. We're happy when they put big return numbers up on the board, bring recognition to our firms and attract new assets. We don't like it, however, when we become too dependent on them. Then we have to dutifully answer to their pay demands, carefully manage their egos (or should I say massage), and above all else, make sure they don't leave.
Over the years, mutual fund companies have been more than happy to showcase their star managers. Just about the time the NBA went from promoting the Lakers and Celtics to showcasing Magic and Bird, fund companies started putting their portfolio managers on billboards. They did it for the same reason the NBA did - it sells.
And despite the managerial challenges, it's an asymmetric bet for the fund company - more assets are gathered because of the star than are redeemed when said star leaves or retires. The risk is one of lost opportunity, not lost assets. (I'm always amazed that the fallout isn't worse when a highly regarded manager leaves. Some clients sell the fund, but it's never as bad as first predicted.)
I have a particular interest in the dependency dilemma because it's a natural consequence of my investment approach. And being a relatively small and young firm, we get asked about it a lot. What happens if one of your fund managers leaves? How dependent is the firm on Tom's leadership? What if he goes skiing and never comes back?
Whether I am running a big or small firm, my philosophy is always to look for the "three smart people in a room." I'd rather have the best person or small group I can get than a large team spread around the world. I want the full benefit of their intellect, experience and temperament, unencumbered by size and organizational constraints. And when I find a talented money maker, who may or may not be well known, I'm happy to get on their back and ride them for all they're worth.
Beyond investment returns, this approach has the advantage of being transparent. It's clear who's managing the portfolio, or at least, losing sleep over it. And it's equally clear when they're gone. With the team approach, you don't always know who the key player(s) are or how decisions are made.
That's not to say that the organization a portfolio manager is working for isn't an important factor, because it is. She needs to be in an environment that has appropriate resources and minimal distractions, and importantly, provides support when it's most needed, when the returns are less than star-like. Having said that, I do think our industry focuses too much money and attention on putting horsepower under the hood (teams of analysts) and forgets about the transmission that delivers the power to the wheels (crisp decision-making). I recently heard of a global asset manager that had four analysts in different parts of the company doing research on the same stock. Is that depth or dilution?
In the institutional arena, the three-smart-people approach doesn't work as well. Pension and foundation committees are generally leery about hiring a firm that's dependent on a star. Instead, they're looking for depth on the investment team and want to be assured that if someone leaves, the philosophy and process, and presumably performance, will live on. For an institutional investor, changing managers is costly and time-consuming.
For individual investors, however, the three-smart-people approach makes more sense. They don't want to be changing managers either, or following them around the Street, but it's easy and cheap to do if necessary. So I don't avoid star dependency, but rather embrace it. It's a nice problem to have a portfolio of high-performing, ego-centric managers that I'm worried about losing.